In landmark case, Supreme Court rules that private hospitals, schools subject to tax

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MANILA - (UPDATED 8:23 p.m.) The Supreme Court has ruled that St. Luke's hospital is subject to income tax in a "landmark" decision that would cover all other private hospitals and schools, the Bureau of Internal Revenue said on Thursday.

Commissioner Kim Jacinto-Henares said the BIR secured a favorable ruling from the Supreme Court that found St. Luke's Medical Center Inc tax deficient after the hospital claimed that income derived from paying patients was tax-exempt.

"The Supreme Court merely affirmed what we have been saying: that proprietary educational institutions and hospitals, such as St. Luke's, is liable for income tax but at the preferential rate of 10 percent vis-a-vis the 32 percent corporate income tax imposed on corporations in general," Jacinto-Henares said.

Associate Justice Antonio Carpio penned the decision issued on September 27 by the High Tribunal's Second Division.

"St. Luke’s fails to meet the requirements under section 30 (e) and (g) of the National Internal Revenue Code to be completely tax exempt from all its income. St. Luke’s is therefore liable for deficiency income tax in 1998 at the preferential rate of 10 percent under Section 27 (b) being a proprietary hospital institution of the Tax Code," the ruling read.

Under Section 30 (e) of the NIRC, organizations that are tax-exempt include non-stock corporations or associations organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans. Section 30 (g) exempts from tax civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.

In 2002, the BIR assessed St. Luke’s with deficiency taxes worth P76.06 million - an amount that was reduced to P63.93 million - for 1998. These included income tax, value-added tax, withholding tax on compensation and expanded withholding tax.

St. Luke’s filed an administrative protest, but the BIR failed to act on it within the 180-day period required, thus prompting the hospital to seek an appeal before the Court of Tax Appeals.

The BIR said St. Luke’s was operating for profit in 1998 because only 13 percent of its revenues came from charitable purposes. St. Luke’s revenues that year totaled P1.73 billion, from which its board, employees and officers benefited.

Jacinto-Henares said the BIR expects St Luke's to file a motion for reconsideration.

"By the express provision of the law under Section 27 paragraph B, proprietary educational institutions and hospitals, such as St. Luke's is liable for income tax but at the preferential rate of 10 percent. Nonetheless, we are prepared to defend our position until the end," she said.

In line with the Supreme Court decision, the BIR will immediately issue a Revenue Memorandum Circular outlining the procedures in the payment of tax liability of proprietary educational institutions and hospitals, Jacinto-Henares said.

"We will issue the RMC very soon, so that everyone concerned will be guided accordingly," she said.

Claro Ortiz, BIR head revenue executive assistant and overall coordinator for the Run After Tax Evaders Program, said that the Supreme Court decision is a "landmark" case and would place all hospitals on equal footing as that of St. Luke's for tax liabilities.

"This is a landmark case for us. We are very happy. We will actually look at the other hospitals which are on the same footing as that of St. Luke's Medical Center," he said.

Ortiz said the BIR will look into the tax compliance of the following hospitals:

- Makati Medical Center;

- The Medical City;

- Asian Hospital and Medical Center; and

- Delos Santos Medical Center.

"We want to know if they share the same position as that of St. Luke's and whether they are tax compliant and are actually paying their income taxes respectively," Ortiz said.

No effect

Metro Pacific Investments Corp, which owns Makati Medical Center and the Asian Hospital and Medical Center, shrugged off the Supreme Court ruling, saying it will have no effect on the conglomerate's healthcare business.

"All companies under the Metro Pacifc hospital group are private companies, paying the regular income tax," said Augusto Palisoc Jr., president of the MPIC Hospital Group.

Apart from Makati Medical and Asian Hospital, MPIC owns four other hospitals in the county, namely Cardinal Santos Medical Center in San Juan, Our Lady of Lourdes Hospital in Manila, Riverside Medical Center in Bacolod and Davao Doctors Hospital.

Manuel V. Pangilinan chairs MPIC and TV5, of which InterAksyon.com is the online news portal. 

With a report from Krista Angela M. Montealegre

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